AMZN Stock: Why Amazon.com Inc's Disruption Phase Is Over Now

  • Amazon is not a disruptor anymore.
  • It is pursuing diversification strategies as a means of continued growth.
  • Related and unrelated diversification, as well as the flexibility of the resources obtained, will have an impact on firm's performance.

Amazon.com Inc (NASDAQ:AMZN) was once a disruptor. Those days are long gone. I am surprised that many here don't understand the concept of disruption. There are different degrees of disruption.

Disruption has to be looked at from the perspective of an established company, who's business has been disrupted, to assess the degree to which capabilities and products or services are rendered obsolete. It is a process that, if proven revolutionary, can overhaul an industry. This is the only form of the concept I see being thrown around by the common folk. It is too simplistic and lacks a deep understanding.

Business model disruption is not a permanent classification for a business. When Amazon began, it was classified as a disruptive innovator because the model brought a new and unique value proposition which customers accepted. Currently, you cannot consider Amazon a disruptor. (Most cannot and will not be able to understand this concept.) The e-commerce business model it created has successfully been integrated into physical retailers. Now, the business model that Amazon created can be considered a capabilities building platform, which is the coexistence of both brick and mortar and e-commerce platforms.

Also Read: Is AMZN Stock A Multi-Bagger Even Today?

Although this might seem obvious, I highly doubt it will be acknowledged, given all the blind euphoria about Amazon killing department store retail. Amazon is in a different phase in the industry life-cycle. The innovation is beginning to come from strategic alliances, and acquisitions to aid its online presence. Gone are the days when Amazon could implement the garbage can model. The garbage can model is desirable in a rapidly changing environment. Management and employees basically toss ideas until something works. Recall the fire phone, the trucks, and the 1 click button.

Amazon Now Relies On Diversification

It seems that Amazon is pursuing the conglomerate route with unrelated and related diversification. There are three theories of diversification: the linear model, the inverted U model, and the curvilinear model. The linear model suggests that firms that diversify regardless of related and unrelated diversification will endless benefits. The inverted U model suggests that firms will see benefits with related diversification up to a point before it starts diversifying into unrelated segments due to external pressures by shareholders and analysts which result in poor firm performance. The curvilinear model suggests that firms will see benefits with related diversification but the benefits from unrelated diversification do not exist.

Also Read: 3 Reasons Why Investors Should Buy This Dip In Amazon.com Inc. Stock

We can rule out the inverted U and the curvilinear relationship since those tend to result in downward stock prices. While not exact, it appears that Amazon may be currently experiencing a linear effect with its diversification plays, which IO theory can help explain. The flexibility of its assets may be playing a role. Since Amazon is primarily a technology company, most of its assets are intangible. Intangible assets tend to perform well in both related and unrelated diversification plays. When technology companies proceed with acquisitions, they are trying to acquire tacit knowledge which can extend the life of current competitive advantages. As things stand, Amazon is just trying to maintain its first mover advantage through diversification plays. Amazon is not disrupting anything.

While I believe the effect is currently linear. That may change. A more realistic scenario is the inverted U. Time will tell when that will happen, but as it appears, it's probably just a matter of time.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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